2018 (5) TMI 953 - AT - Income Tax

Denial of adjustment of abnormal cost on account of rent and other maintenance expenditure relating to unutilized capacity held for domestic business - Held that - The facts in assessment year 2008-09 are identical and a perusal of the directions of the Hon ble DRP also shows that even the Hon ble DRP has accepted that approximately 25% of the premises of the assessee were lying vacant/idle during the year under consideration. Accordingly, on identical facts, it is our considered opinion that requisite adjustment should be allowed to the assessee on this issue. Accordingly, we restore this matter to the file of the Assessing Officer/TPO with a direction to work out the requisite adjustment for the idle capacity in respect of rent and related charges after giving assessee proper opportunity. Thus, this ground stands allowed for statistical purposes. Adjustment in respect of royalty - Held that - As considered the assessee s application for admission of additional evidence which has been filed under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and looking to the facts and circumstances, it is our considered opinion that this Addendum to the agreement goes to the very root of the matter and it will suitably assist the lower authorities to reach a logical conclusion on the issue. Since the lower authorities did not have the benefit of examining this document, the matter has to be necessarily restored to the file of the Assessing Officer/TPO for deciding the issue of royalty afresh after duly considering this agreement and after giving due opportunity to the assessee to present its case.

Summary

Issues Involved:
1. Adjustment for unutilized capacity costs.
2. Determination of Arm’s Length Price (ALP) for royalty payments.
3. Admission of additional evidence.

Detailed Analysis:

1. Adjustment for Unutilized Capacity Costs:

The primary issue was whether the assessee should be granted an adjustment for the costs associated with unutilized capacity, specifically rent and maintenance expenses. The assessee argued that the idle premises were not utilized for rendering services to the associated enterprises but were retained for anticipated future growth and third-party domestic business. The Tribunal noted that in previous assessment years (2004-05 and 2006-07), similar adjustments were allowed, and these decisions were affirmed by the Hon’ble Delhi High Court. The Tribunal found that approximately 25% of the premises were indeed lying vacant during the year under consideration. Consequently, the Tribunal directed the Assessing Officer (AO) and Transfer Pricing Officer (TPO) to work out the requisite adjustment for the idle capacity costs after giving the assessee a proper opportunity. This ground was allowed for statistical purposes.

2. Determination of ALP for Royalty Payments:

The second issue concerned the determination of the ALP for royalty payments made by the assessee to its Associated Enterprises (AE). The TPO had determined the ALP of the royalty transaction to be nil, holding that no recognizable benefit had been derived by the assessee from such payments. The assessee sought to introduce additional evidence, specifically an Addendum to the Intangible and Proprietary Property and Licensing Agreement, to substantiate its claim. The Tribunal admitted this additional evidence, noting that it went to the very root of the matter and would assist the lower authorities in reaching a logical conclusion. The matter was restored to the file of the AO/TPO for a fresh decision on the issue of royalty after considering the new evidence and giving the assessee an opportunity to present its case. This ground was also allowed for statistical purposes.

3. Admission of Additional Evidence:

The assessee filed an application for the admission of additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. This evidence was an Addendum to the Intangible and Proprietary Property and Licensing Agreement, effective from 2.1.2002. The Tribunal admitted this additional evidence, recognizing its significance in determining the ALP for royalty payments. The Tribunal noted that the lower authorities did not have the benefit of examining this document, which necessitated the restoration of the matter to the AO/TPO for a fresh decision. This admission of additional evidence applied to both assessment years 2008-09 and 2009-10.

Conclusion:

The appeals for both assessment years 2008-09 and 2009-10 were allowed for statistical purposes. The Tribunal directed the AO/TPO to reconsider the adjustments for unutilized capacity costs and the determination of the ALP for royalty payments after duly considering the additional evidence provided by the assessee. The Tribunal also allowed the assessee to raise remaining grounds again before the Tribunal at a future date if required.